Overseas Chambers of Peter Harris

Maison de la Boucterie
Rue de la Boucterie
Saint Saviour
Jersey, JE2 7ZW

42. Trusts, French anti-avoidance and article 123 bis CGI The Cour d'appel administratif de Paris has eviscerated the French administration's failed attempt to apply article 123 bis CGI to trusts.

September 18th 2020

It has always been a mystery how the French tax administration were able to believe that they could treat a trust which is not a company as if it was one. It is a common failing, paralleled on the English side of the Channel in other areas

One of the distinguishing features of a trust is that it is a property arrangement; not a contractual "organisme".

That means that in reality and existentially, a trust cannot produce French corporation tax returns as the French legislator, particularly in article 123 bis CGI assumed that it should, for example. Whilst Senator Marini was informed of that during his visit to Jersey in 2017, the message still had yet to get through to the central mind to the extent that that exists in Bercy.

This may have implications in other areas, for example, the 3% annual tax on real property holding entities which the administration has assumed includes trusts and is based upon similar assumptions, namely that a trust can embody voting roghts and rights akin to share capital. The Cour d'appel in the case below clearly agreed wiith the taxpayer that that was not the case.

Back to foreign trusts in France :

The French administration has consistently attempted to treat trusts as corporates at all levels of its limited constitutional competence and powers. That is obviously a fallacy and has led to the most imperfect sets of deeming  provisions and administrative misconceptions.

The Cour d'appel administratif de Paris has just clamped down and trashed that practice in an judgment handed down on 24th June, 2020, which needs to be widely advertised.  Hence the recourse to a STEP Forum.

The case involved the application of article 123 bis CGI to certain Bermudan trusts.  Those familiar with this issue will recall that the idea of article 123 bis was to treat corporate offshore entities as French tax avoidance vehicles and tax them as if they were look through corporates. These were required to file French impôts sur les sociétés corporation tax returns, which as everyone with a flicker of accounting imagination will realise is an impossibility. A trust has neither a capital, nor voting rights nor for that matter anything beyond a method of holding property under the law of property. There is no affectatio societatis , no contractual or corporate structure, no directors or general meetings of shareholders.

In effect the Court held that :

The French taxpayers did not hold any voting rights in the trust, let alone the 10% requited to trigger the article 123 bis look through. It is quite incredible that the French administration had the gall to assert that they did; and

The French taxpayers did not hold any « droit financier » in the trusts, despite the fact that they could receive payments from the trustees.

So, the attached judgment might interest those practitioners and trustees offshore with French resident settlors or beneficiaries.

The trusts in question were discretionary and irrevocable. They had been constituted by the settlors prior to their moving to France, had been constituted for perfectly valid reasons and were not judged to have been avoidance vehicles under article 123 bis §4 bis. The French administration were simply told, politely,  to grow up.

Without wishing to labour the point, I and others have been stating this unavoidable fact since article 123 bis CGI came into force.

However, this judgment was taken in the context of discretionary irrevocable trusts, and might not be immediately transposable to affect interest in possession  trusts to the same extent. Advice still needs to be taken in relation to these. In particular the impact of the Trusts Disclosure régime following on from article793-0 bis CGI is not addressed in the judgment, as those are IFI, gift and succession duty issues. The issue here was income tax.

The judgment is particularly instructive in relation to the future of British influenced trusts post-Brexit.

See https://juricaf.org/arret/FRANCE-COURADMINISTRATIVEDAPPELDEPARIS-20200624-19PA00458